Trump Directs Government Spending to Opportunity Zones

President Donald Trump has launched a new interagency council to help funnel federal spending into the designated low-income zones created in last year’s tax bill.

Trump issued an executive order Wednesday creating the interagency White House Opportunity and Revitalization Council, to be spearheaded by Housing and Urban Development secretary Ben Carson. The council will span some dozen federal agencies, with the goal of putting Opportunity Zones at the forefront of funding in areas like small-business finance, water and broadband infrastructure, rural development, or crime enforcement.

“The resources of the whole federal government will be leveraged to rebuild low-income and impoverished neighborhoods that have been ignored by Washington in years past,” Trump said as he signed the order. “With Opportunity Zones, we are drawing investment into neglected and underserved communities of America so that all Americans, regardless of zip code, have access to the American Dream.”

“Qualified Opportunity Zones” are newly designated economically depressed areas, delineated by local government officials and approved by the Treasury Department. Under a provision in the December 2017 tax bill, investing in these zones can confer hefty tax benefits. If investors pour capital gains into real estate or business equity in such an area, they reduce the tax basis on that original capital. Any gains generated by the Opportunity Zone investment can be tax-free if held long enough.

Opportunity Zones are largely the brainchild of Napster co-founder and venture investor Sean Parker and Steve Glickman, a former advisor to Barack Obama. The pair co-founded a think tank, the Economic Innovation Group, helped to craft the original legislation, and worked on Wednesday’s executive order. EIG’s current preisdent and CEO, John Lettieri, is a third co-founder.

The program is intended to help revitalize areas of America that unlike New York, Los Angeles, and San Francisco, didn’t bounce back from the financial crisis.

The government push to bolster this program should help “fill some of the existing holes” in these targeted communities in a way that private capital wouldn’t, Glickman tells Barron’s.

“If you have all the parts of the ecosystem humming, you can start to see real change,” Glickman says. “Capital’s never going to be enough for most of these places,” he says. These areas need things like “workforce training, the infrastructure money and crime prevention dollars,” to allow for any revitalization to take hold, he says.

This program may also be a bright spot of bipartisan collaboration in an otherwise polarized Washington, as the administration works more directly with state and local government officials seeking to capitalize on the program, he says.

Some of the rules from December 2017 are still a little foggy, like one potentially putting geographic restrictions on zone-business income. Real-estate investing under the program is more clear, and as a result 115 funds have already popped up, according to CoStar, which keeps an Opportunity Zones Funds Directory.

Treasury was expected to release two rounds of regulatory guidance clarifying the rules this month, but that now appears more likely to happen in January.

Many of the Opportunity Zones overlap with well-heeled areas that probably don’t need the boost. But in the impoverished areas the zones are meant to target, the most potent criticism is that they could serve as a “crowbar for gentrification,” as one business owner put it.

Residents of those places are less likely to be holders of capital gains and so are less able to reap the benefits. They are likely to be affected nonetheless as real-estate development ramps up, pulling forward development that would have otherwise taken years. Residents unable to pay rising property taxes will be far more quickly displaced.

One part of this order may help address that. The new council, assisted by the Council of Economic Advisers at the White House and working with Treasury and Commerce, may craft ways to collect and measure the data around capital flows and what impact the program has on economic growth and job creation in a given area, Glickman says.

Investors are also at risk. As it stands, this program is only lightly monitored. Qualified Opportunity Funds, which must invest 90% of their assets in the zones, are relatively unregulated. Funds pooling multiple investors and managing over $150 million will be regulated by the U.S. Securities and Exchange Commission as usual. But funds overseeing less than $150 million simply self-certify to the Internal Revenue System that they’re investing correctly, and be prepared for an audit every six months.

The White House’s move Wednesday to increase its participation gives the administration a greater stake in the program’s success, as well as an opportunity to show it is making a difference in helping poorer communities. This is particularly relevant given that Trump ran on a populist platform that slammed global trade policies for hurting rural America’s manufacturing and production. Tariffs imposed in an escalating trade war have had the effect of raising prices on goods for American consumers.

“This is one of the few parts of tax reform that you can point to that address the communities the president ran his campaign around,” Glickman says. “This would be a huge whiff and create a lot of backlash for the administration if they didn’t go out of their way to make sure this is useful for business investment like it was intended.”